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Growth in the Naughties

January 20, 2011 8:44 amJanuary 20, 2011 8:44 am

Yesterday I posted a brief note about how to think about the 2000-2007 expansion, now that we know that there was
an unsustainable housing-and-debt bubble. My point was that this doesn’t mean that the growth was somehow fake; real output of goods and services did indeed rise, even if the legacy of that growth was debt
that create macroeconomic problems now.

Charles Steindel emails to remind me that he actually did a quantitative assessment (pdf). In that analysis, he asked how much our estimates of actual
growth are affected if we consider the possibility that (a) what Wall Street was doing wasn’t actually productive (b) much of the housing will end up being less useful than expected (e.g. ghost towns at the
edge of urban areas).

What he finds is that even with fairly strong assumptions about phony financials and wasted investment, you can’t make more than a minor dent in growth estimates. On the financial side, the point is that we measure
growth by output of final goods and services, and fancy finance is an intermediate good; so if you think Wall Street was wasting resources, that just says that more of the actual growth was created by manufacturers
etc., and less by Goldman Sachs, than previously estimated. On the housing side, the point is that residential construction, even though it was at high levels, never got much above 6 percent of GDP. So even if you
believe that a large part of the construction taking place late in the housing boom had very low usefulness, it only subtracts slightly from growth over the course of the whole period.

Meanwhile, Mike Konczal points us to new work at the SF Fed on the role of household debt in the slump, further reinforcing the case that stressed household balance sheets are at the core of our problem. Indeed. What this says, however, is not that the economy couldn’t
and shouldn’t be producing more; it just says that we should be pushing harder on unconventional monetary and fiscal policies.